Real estate fund exits from investments may turn out to be a mixed bag this year as equity funds of 2005-06 come under pressure to return money back to investors and the newer lot of debt funds gear up for quicker, better returns. Returning money back to investors will be a key challenge for some of these earlier real estate funds, as some investments in firms are stuck due to their inability to create an exit route through an initial public offering (IPO), said property analysts and fund managers.

So, while many fund managers speak of high returns that individual investments have made, the average weighted returns of overall portfolios of funds have been pulled down by poor quality exits or the lack of them. HDFC Property Fund is trying to complete most of its exits this year from its first domestic fund of 2005 called HIREF Domestic. “Once most of the exits are completed, the average IRR (internal rate of return) of the portfolio would be around 14% which is decent but not as per expectations,” a fund manager said, requesting anonymity.

“So while the better investments have got 25-26% returns, some have got 18-19%.” HDFC Property Fund has not yet exited its entity level investment in Vascon Engineers Ltd, for example. “The intrinsic value of the company is good but the share price has eroded from Rs.130 to Rs.30 today making it tough for a profitable exit,” the fund manager cited above said. Vascon didn’t respond to an email query. Exits are critical to show money is being returned to investors, in order to pave way for more capital to come into Indian real estate.

While in residential investments cash flows generated from a project pay the investor, in commercial office projects investors either have to sell them to a buyer or sell them back to the developer. Morgan Stanley Real Estate Investing (MSREI), the global real estate investment management arm, which made a number of investments both in projects and in companies in India, has again faced delays in exiting or selling some of them, said a person who didn’t wish to be named. Among the entity level investments, it has partially exited Oberoi Realty Ltd, which went public in 2010.

However, it is figuring out an exit route for its 2006-07 investments in Bangalore-based Mantri Developers Pvt. Ltd and Pune’s Panchshil Realty Ltd. “It’s been 6-7 years since these investments and discussions are going on for the exits. There could be solutions like a share swap, where an entity level investment can be swapped,” said the second person cited above. While there is no pressure as such to exit, real estate investment trusts or REITs could provide a good exit route once they kick off, said Atul Chordia, chairman, Panchshil Realty.

Sushil Mantri, chairman and managing director, Mantri Developers didn’t respond to queries. To be sure, there are a few who have managed profitable exits. Also, with a number of debt funds coming in, where investors offer pure debt finance or structured deals, combining high-return, high-risk equity with modest assured returns of debt, exits may be quicker and more secured. HDFC Portfolio Management Services, part of HDFC Asset Management Company Ltd, which raised a Rs.4,000 crore fund corpus in 2008 and made 25 investments, has exited 15-16 of those and returned around 1.2 times the capital back to investors, said a third person, who also declined to be named.

“There were no entity level deals, no investments in IT (information technology) parks or special economic zones or any large townships. They are plain vanilla residential investments with homes priced at Rs.2,000 a sq ft to Rs.90,000 a sq. ft,” he said. Exits are happening, essentially if one would have done appropriate due diligence during the deal, according to Rahul Rai, head, real estate investments business, ICICI Prudential AMC Ltd.

“That’s our experience in the investments we have done so far,” Rai said. It has made around Rs.120 crore of exits and expects another Rs.300-400 crore before March 2015. Exits became tougher in the last two years when there was an evident slowdown in the market as projects were delayed and cash flows were slow, property analysts said.